Written evidence submitted by Digital Catapult (LEA0227)
Digital Catapult is one of 11 Catapult centres set up by the government, a network of world-leading centres designed to transform the UK’s capability for innovation in specific areas and help drive future economic growth.
It became operational in 2013 and our centre in London was opened on 5th November 2014. We were set up by Innovate UK to drive future economic growth in the digital economy. Digital Catapult is a company limited by guarantee and a not-for-profit research and development organisation.
The most recent figures published by the UK Office of National Statistics show that only 7% of UK national output comes from the digital sector and only 9% of businesses form part of the digital workplace. As the Economist recently pointed out, this is smaller than you might think, given the level of media coverage the sector attracts and significantly behind the world’s leader in this regard, South Korea, where the digital economic contribution is more than 11%. There are many brilliant digital businesses in the UK, so there is plenty of opportunity and still considerable work to be done. This is why Digital Catapult is here – to help increase the number of digital businesses, and the numbers employed in digital roles. In short, Digital Catapult is here to help grow the UK digital economy.
Digital Catapult works with SMEs to help them grow and scale faster. It helps larger corporates in their digital transformation. It does this through programmes of collaboration and open innovation, by bringing academic leading edge expertise into the mix combined with the organisation’s own business and technological expertise.
Digital Catapult carries out applied research and development collaboratively in order to open up new markets for large numbers of SMEs to enter in new and emerging technologies. It achieves this by tackling large-scale digital challenges that are too complex, financially risky or will take too long for market forces alone to deliver.
Digital Catapult works across a range of technology layers:
1. Next generation Internet: Internet of Things, distributed ledger technologies, decentralised web, 5G and low powered wide area networks
2. Data-driven: trust, privacy, identity and security
3. Intelligent: machine learning and artificial intelligence.
By applying business and technology know-how to the new commercial opportunities unlocked through Digital Catapult’s programmes and collaborations, new markets and opportunities can be created for UK digital companies.
Through Digital Catapult’s work with organisations across the digital landscape, it is uniquely placed to help Government implement digital policies and identify policy needs in emerging technologies.
We submit this response to the inquiry to emphasize the importance of the digital economy and how vital is to maintain current levels of growth that are threatened by leaving the EU.
The turnover of UK digital technology industries is estimated at £161bn and UK digital businesses are growing faster in turnover, GVA and productivity than the rest of the economy. The UK continues to be the highest per capita adopter of e-commerce of any country in the world. In 2015, e-marketer estimated that UK ecommerce exceeded £60bn, representing 14.5% of total retail sales. This forecast is to grow to 19.3% by 2019. 1.56 million people are employed in digital tech companies in the UK. 50% of these have been formed since 2008, and 98% of these are small businesses. 75% of the estimated 58,000 UK digital tech companies are based outside London.
Despite the rapid growth of digital (around 30% faster than the rest of the economy), there is still plenty to do here to make the impact more evenly felt across the whole economy. The digital sector’s economic contribution of £118bn in 2014 is still below that of manufacturing (£151bn) UK growth of new digital businesses is not declining yet, for many of the businesses, the challenge remains how to scale. We remain confident that the opportunities for UK businesses to profit from digital transformation remain considerable. The opportunities to help SMEs to grow and scale into new markets developed out of emerging technologies are also very substantial indeed. That is why we need to continue to accelerate the development of digital with a strong sense of wanting to promote that which is commercial and ethical, both in existing UK businesses and in new digitally focused SMEs.
We have identified a number of risks to this growth by leaving the EU, linked to access to:
Applied research in the digital economy and support for innovative SME ventures are areas that will continue to need public support, either through grants, fiscal incentives or other mechanisms. European funds have been an essential source of funding to support these activities for Digital Catapult.
Digital Catapult, as of the day this response has been submitted and since 2014, has secured over € 4,5 million from Framework Contracts and £ 225,000 from ERDF Structural funds. The ERDF contract has not been signed yet; and the contracts for the new projects will be signed in the next few months.
Digital Catapult was reassured by the recent announcement from the government guaranteeing payments from the projects submitted by UK legal entities, even when specific projects continue beyond the UK’s departure from the EU. This secures the majority of funding awarded to Digital Catapult and leaves our organization to consider an immediate liability of £225, 000 linked to the structural funds.
In the medium to long term the Catapult is at risk of losing a significant opportunity to attract funds to the UK and faces disruption to existing projects, European partners may hold back from partnering with organisations with whom they don’t have a long term cooperation horizon. Digital Catapult is losing the capacity to build its regional presence using regional development funds and to offer support programmes to SMEs together with regional partners.
Building relations and accessing funding in other parts of the world will be resource and time intensive because of longer travelling times, possible language barriers and learning new ways of working and governance structures.
In summary, access to key funding for applied research and business scaling up is at risk of being disrupted and reduced with unforeseen consequences for the growth of the digital economy.
Disruption to the free flow of individuals, to and from the Continent, will affect access to talent for the Catapult network, that draws heavily on talent from the EU and all over the world and particularly in digital for the tech sector SME communities. There is a shortage of tech talent in the UK and hiring and retaining qualified staff in the digital space is a continuous challenge. An example is Digital Catapult where 15% of current staff come from the EU.
Tech city UK has published results[1] of a post-brexit survey of the tech sector which reveals concerns over recruitment and access to skills. The biggest issue for companies is hiring and retaining non-UK staff, half of respondents (51%) say they think that it will be more difficult to attract and retain the very best talent. 70% of employers surveyed want to hear a clear message on EU resident’s ability to live and work in the country. 79% want improvements to the visa system, so that the most talented people in the world will be able to live and work in the UK.
Furthermore, 1 in 5 directors[2] of technology start ups are foreign nationals, and a high percentage are EU nationals that are attracted to London, leaving the EU would potentially make the UK less appealing for entrepreneurs.
Depending on the negotiation for an alternative to full membership and the restrictions to this particular freedom, the influx of highly skilled EU workers could be disrupted and the economy suffer for that. Competition for EU nationals with key digital skills from places like Berlin and Dublin will be up, and Paris announced recently its intention to enter the race as well.
In summary, access to talent for the digital industries, already difficult, is at risk of being disrupted and potentially reduced if the right measures are not put in place swiftly in the short term.
We should have an ambition to go to Europe and globally, to build partnerships that benefit our industries and this is a key point we want to raise with this committee. The digital economy is a complex non-linear ecosystem between science, business and innovation, which together take world class science into top businesses, resulting in economic growth. This ecosystem works well in the UK, with a thriving digital scene, that relies on EU and international partnerships for applied research in collaboration with academia and industry and helps scale up digital SMEs.
It is also important to point out that, until now, we have benefitted from our unique geography and position between the US and Far East governments and economies and the EU emerging Digital Single Market (DSM), with its vision to bring down barriers to unlock digital opportunities, and this advantage is at risk.
The key risk for Digital Catapult is to lose influence over the development of the DSM and, in parallel, have limited access to it a point we make later in the text. It is key to keep a seat at the negotiation table over barriers for innovation for a successful digital economy and to make sure the UK voice is heard and taken into account. The EU is at risk of losing the pragmatic and entrepreneurial voice of the UK that has influenced the development of pan-European technology and business visions.
Digital Catapult has been very active in building EU relationships, since 2014 we have achieved very close relations with key EU digital technology ecosystems. We are Founding members of AIOTI (Alliance for the Internet of Things) and ECSO (European Cybersecurity Association), members of the Steering Board of NEM (New Emergent Media), members of BDVA (Big Data Value Association), EARTO (European Association of Research and Technology Organizations), EIT Digital and the 5G Association.
We have excellent relations and existing funded projects with many EU organizations around each of these ecosystems, and we need to keep relational momentum, we cannot have a gap. There is a real risk of other EU organizations excluding us and our SMEs from funding and collaborative opportunities towards the end of our EU membership and we absolutely need to keep being invited to the party.
Furthermore, participation in these fora allows us to bring the technology priorities of the UK digital industry to the EU work programs in different areas. Keeping relations going is essential to stay relevant.
In summary, leaving the EU will affect not only our capacity to do collaborative R&D with top EU organizations, but will affect the capacity to engage and influence the development of R&D programs in the digital economy and the growth of ecosystems and marketplaces where UK SMEs can play at the same level.
Digital is one of the last markets to converge in the EU, and the key overall risk is to lose influence over the development of the Digital Single Market and, at the same time, have limited access to it. However, there are a number of evolutions that might affect UK competitiveness in the short to medium term:
In summary there is a risk UK businesses might lose influence on the development and adoption of frameworks and standards that lower barriers to growth in the digital economy and that will affect UK businesses competitiveness.
We would like to highlight the importance of reduced access to finance and reduced capacity to attract finance from the EU particularly for digital SMEs, investments that fuel their capacity to carry out innovation projects and grow, and with them, the digital economy. Many investment decisions prior to the referendum had in their term sheets conditions linked to the referendum outcome. Although we don’t have hard numbers available, there is a sense in the market that decisions are on “hold”, especially for follow on rounds of investment and series A.
Bloomberg reports “between 2011 and 2015, the European Investment Fund (EIF)[5] committed 2.3 billion euros ($2.5 billion) to 144 U.K.-based venture firms. That amounts to about 37 percent of all venture funding raised in the U.K. during those years, according to data from Invest Europe, the trade association for European VC firms.”[6] Jon Moulton, founder of private equity firm Better Capital, told The Financial Times that the Luxembourg-based European Investment Fund is the largest investor in UK venture capital firms and warned the European fund "would probably stop investing in the UK" if Britain left the EU.
When a digital SME is aiming to access finance of this type, its “desirability” factor is essential. These are linked to the team (talent present), market validation (sector and territories) and market traction (including easy access). Leaving the EU will alter the desirability factor for digital SMEs with unforeseen consequences for the digital economy, plus, the UK might no longer be able to participate in wider projects such as EFSI (European Fund for Strategic Investment) http://www.eib.org/efsi/.
In summary there is a risk of reduced volume of finance available to digital SMEs in order to realise their innovation plans, as well as a danger in not being able to attract the skills and have easy access to proximity markets in Europe.
Leaving the EU has potential to promote and enable flexible frameworks that can be good for innovation in the digital economy.
Here we present some untested ideas for which we don’t have evidence of their potential risks, viability or effectiveness, but that are interesting to consider in a post-brexit landscape, around the same risk factors identified in the previous section.
While existing funding frameworks are accessible and until negotiations determine the new ones, it is uncertain if applying for EU funds is a good ROI. It seems imperative for organisations like the Catapults to seek alternative sources of funding that play to their strengths and overall mission of innovation and economic growth.
The Newton Fund, the Global Challenges Research Fund and the Cross-Government Prosperity Fund are three potential avenues to access to funding targeting sectorial growth and innovation, particularly interesting for the UK digital economy, in economies outside of the EU.
It could also be possible to replace EU public funding with UK public funding where most efficient to accelerate growth of the digital economy. There is an opportunity to support more companies with a high growth potential with different limits on public support, as EU anti-competition compliance will no longer apply.
Addressing the future skills needs of industry, particularly in regard to high-end and complementary digital skills sets is a challenge for the UK. Recent analysis indicates that demand for high-level skills will rise in coming years with an additional 2 million jobs projected by 2022 (further exacerbated by an increasingly ageing workforce), and the share of employment in almost all occupations shifting in favor of higher level qualifications. The UK should enable companies to be able to hire and remunerate staff wherever they are, whilst keeping operations and returns in the UK.
While it makes sense for Digital Catapult to maintain the relations built with EU peers, it is important to be aware of the opportunities brought by expanding links with lead digital innovators in other geographies such as the US, South Korea, Japan, Canada as well as up and coming players: China & South East Asia, South America, Africa. Investment in the expansion and reinforcement of international ties involves activation of the FCO, UKTI offices abroad the SIN Network; a mapping exercise of key markets where the UK has the strength to develop closer research and business links should be carried out.
It would be possible to work with the digital SME communities and the investors communities on talent attraction and retention and first market validation, standards and regulation assistance in non EU markets, leveraging on the UKTI and the SIN networks, in countries of high growth of their digital economies.
It would also be possible to secure similar trading deals and fiscal regimes as EU member states for UK legal entities, and reinforce the work with US based investment firms and build further links and common projects with the Silicon Valley ecosystem. Further bilateral agreements with BRIC countries might also enable the digital community to thrive.
The basic principles that Digital Catapult believes should inform the Government’s negotiations and exit agreement, in order to best represent the interests of the digital economy and mitigate risks associated to leaving the EU, are:
August 2016
[1] http://www.techcityuk.com/blog/2016/07/tech-reaction-to-brexit
[2] http://startups.co.uk/one-in-five-uk-tech-start-up-founders-are-inmigrants/
[3] https://ec.europa.eu/digital-single-market/node/28785
[4] http://europa.eu/youreurope/business/start-grow/european-company-legal-form/index_en.htm
[5] http://www.eif.org/
[6] http://www.bloomberg.com/news/articles/2016-07-01/brexit-and-that-huge-eu-investment-fund-you-ve-never-heard-of